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Home sellers ‘aren’t selling’ as mortgage rates climb, economist explains

First American Deputy Chief Economist Odeta Kushi joins Yahoo Finance Live to discuss August existing home sales data, rising mortgage rates, inflation, what prospective home buyers should expect, and the outlook for the housing market.

Video Transcript

- Let's talk about that now. Joining us to discuss is First American's Deputy Chief Economist Odeta Kushi. Good to see you, Odeta, as we look at these numbers.

Interesting that we didn't see more of a drop. But just sort of high level, how would you describe the state of the housing market right now?

ODETA KUSHI: Well, it's great to be here. So there's a demand and a supply side to this story. Clearly, on the demand side, buyers have pulled back from the market as affordability has quickly deteriorated and mortgage rates have hit above 6%.

On the supply side, you can't buy what's not for sale. And sellers are sitting tight right now because they're locked into these historically low mortgage rates and they don't have the financial incentive to move.

And so we're finding that sellers aren't selling, buyers have pulled back. And that's resulting in a housing market that's cooling quite a bit.

- And on the other side here, I mean, I guess, holistically, I should say, you've got home buyers or prospective home buyers who are still looking for where they could find inventory, where they can find a home that they can compete with on an offer.

And if they're not able to do so, they're staying in the rental space. Redfin actually had just reported asking rents climbing 11% in August.

And even though that is the smallest gain in a year, it still does go to show that you've got some prospective home buyers that are still impacting the rental market and the renters out there that are still having to take on the burden of some of the higher prices.

ODETA KUSHI: Right. So renters have a tough decision. If they're interested in buying, affordability is down. And to your point, inventory, particularly at that starter home price range, is still incredibly limited. We're still facing historically low levels of inventory in a housing market that's under built.

And so they're facing higher rents and higher home prices, reduced affordability as well. So they're certainly in a tough spot.

We are seeing rent growth start to decelerate. Similarly, house price growth is decelerating as well. So that's some welcome news for those potential homebuyers.

- You know, like so many other things that we saw during the pandemic, Odeta, it feels like that this is a rebalancing to a more quote unquote "normal" level, perhaps.

But I don't know what normal looks like anymore. How long do you think this process is going to last. And to you, what does a normal median home price look like? What does a normal existing home sales pace look like?

ODETA KUSHI: It's a great question. So double digit annual house price growth is not sustainable. So the market of the last two years is the exception, not the rule. It was an incredibly hot seller's market.

You could argue we're still in a seller's market across many top markets across the country, certainly not as competitive as it was early in the year or last year, but still very much in a seller's market.

I think you'll start to see house price deceleration to more reasonable pace. Historically, it's been about 4% to 5%. Mortgage rates are actually, believe it or not, right in line with historical average, if not a little bit below.

So the housing market just needs to adjust to this not so new normal of higher mortgage rates, slightly slower sales pace and more moderate house price growth.

- And so, for the prices that even new homeowners are looking at or trying to get into right now, I guess, I think-- and I'm kind of thinking on my own personal level here a little bit.

But even for those of us who are just looking to get into their first home, this could have a much larger implication on households ability to build equity and build wealth over time too, even if they are priced out of the housing or buying opportunity right now. Do you have a sense of what that implication could look like more long term?

ODETA KUSHI: So there's still this fundamental demand for home buying in the United States. There's this massive generation of millennials that continues to age into their prime home buying years. And they are buying later in life compared to their generational predecessors.

So it's really a question of when, not if. These home buyers are currently, or potential home buyers, are sitting on the sidelines right now waiting for the market to adjust, waiting for prices to rebalance to a point where their monthly payment is affordable.

And when that time comes, they'll jump back into the market. So maybe delayed wealth building, but certainly not forgone.

- Odeta, good to see you. Thanks so much. Odeta Kushi, First American's Deputy Chief Economist.